Viacom profit declines on film comparison, ad sales

DavidB. Wilkerson

CHICAGO (MarketWatch) -- After issuing a profit warning last month, Viacom Inc. reported Monday that third-quarter net income fell 37% due to difficult comparisons to the year-ago quarter that included proceeds from the movie blockbuster "Transformers" and the impact of the financial meltdown on advertising sales.

Viacom
VIAVIA, -0.35%
said it earned $401 million, or 65 cents a share, compared with a profit of $641 million, or 96 cents a share, in the third quarter of 2007. The prior-year period included a $192 million gain on the sale of the Famous Music publishing company.

The media conglomerate said that excluding tax benefits, it would have earned 55 cents a share from continuing operations in the latest three months.

Revenue rose 4% to $3.41 billion, fueled by strong sales of the music video game "Rock Band."

Analysts polled by FactSet Research, on average, had expected Viacom to turn in a profit of 56 cents a share on revenue of $3.29 billion.

The company said it expects to report 2008 earnings per share from continuing operations that represent a mid-single to low-double-digit percentage increase over 2007 earnings of $2.36 a share.

The company had disclosed in October that its third-quarter results would be undercut by a roughly 2% drop in worldwide advertising revenue in the period, primarily reflecting a weak U.S. market. It also said it expected to report third-quarter earnings excluding special items between 53 and 55 cents a share.

Revenue at Viacom's media networks rose 6% to $2.13 billion. Ancillary revenue jumped 36%, driven by "Rock Band." The company is new to the video game business, having entered that arena a year ago.

Chief Financial Officer Thomas Dooley said U.S. automotive advertising sales saw the largest decline in the quarter. "This was partially offset by an increase spend by foreign car makers," he said. "We also experienced weakness in the beverage and video game categories due to fewer product launches."

Dooley added that the trend in Hollywood toward fewer movie releases also hurt ad sales in the third quarter.

Ratings woes at MTV

Chief Executive Philippe Dauman told analysts on a conference call Monday that the company is working to resolve ongoing ratings problems at MTV.

Dauman said the channel has difficulty getting people to watch its programs more than once, though he pointed out that MTV remains the No. 1 cable network among its target audience of viewers 12 to 24 years old.

To improve this situation, Dauman said MTV is going to increase the amount of original programming on the network. Another plan is "new programming blocks that serve subsets of our highly targeted demos," he said, enabling the network to offer advertisers a more precise way to reach their customers.

MTV will introduce interactive applications to engage younger audiences such as a chat interface that runs live online while a show airs. Viacom will also use other MTV-branded channels to more heavily promote MTV's more successful shows, such as the reality programs "Exiled" and "The Hills."

Dauman said that across its networks, it expects to see spending on original shows increase by a high-single digit percentage during 2009.

An analyst pointed out that Viacom has tried before to add more original programming to MTV, and yet the network still has difficulty. Dauman countered that the company's investments in original shows have paid off at Nickelodeon and Comedy Central.

Viacom has missed out on some of the cable network advertising strength seen by peers such as Time Warner
TWX, +0.72%
Walt Disney Co.
DIS, +1.43%
and News Corp.
NWSNWS, +1.64%
partly due to ratings difficulties at MTV.

Fees paid by cable and satellite providers rose 12%.

Filmed-entertainment revenue was about flat at $1.31 billion, as a 30% spike in home entertainment revenue was offset by the strong performance of "Transformers" a year earlier. Television license fees rose 16% to $342 million.

Viacom's Class B shares declined 23 cents to close at $19.99 ahead of the announcement on Monday.

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